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TonyTax
TonyTax, Tax Consultant
Category: Tax
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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Hi I have a flat as a second home which i rent out. Im thinking

Resolved Question:

Hi
I have a flat as a second home which i rent out. Im thinking of selling in the next couple of years and wish to know what steps i can take to minimise CGT when i eventualy sell it.
I have owned and lived in the flat between 1981-2000 rented it lived in it 2006-7 and now rent it out.
any advice appreciated
Norman Lucas
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.
Hi.

If you let me have the following information, I'll do some calculations:

1 The value of the property as at 31 March 1982 or the 1981 purchase price.

2 The month in 2000 you moved out. The month you first let the flat. Was it let continuously between 2000 and 2006.

3 The month in 2006 the letting stopped and you moved back in.

4 The month in 2007 you moved out and the month in 2007 the property was re-let.

5 The value of the property now.

6 Have you owned any other property that you have lived in since you bought the property you currently let. When was the property purchased?
Customer: replied 2 years ago.

Timeline of Flat. New details as requested (sorry did not realize you needed months etc). This will answer all the questions you ask above.

Bought 27th July 1981 with Katherine Lucas (wife) for £21,000

June 1985 valued at £35000 (paid £8500 to pay off wife) and become sole owner in April 1986

Moved out 3rd Jan 1992 flat values at £105,000. Joint ownership with Ann Ball (Partner)

Bought property (house) in Jan 1992 and lived there to Jan 2005. My partner and I split up and we made a money deal and she kept the house we lived in and i moved back to the flat.

Rented flat from April 1992 to Nov 2005 more or less continuously

Moved back in to flat in Jan 2006 valued at £275,000. Bought off Ann Ball to become sole owner again

Moved out of flat Feb 2007 and bought house in Dec 2005 that i now live in

Rented from May 2007-to date

Valued in July 2014 at between £700,000 and £750,000. Mortgage at £238242. So equity about £500,000.

My question is what is the capital gains tax? and what steps should I take to minimise if I sell in a couple of years time.

I am at present on 40% tax rate-but will be retired in the next couple of years.

Expert:  TonyTax replied 2 years ago.

Thanks.

There is alot to deal with here. How much did Ann Ball pay for a share of the flat, if anything? When did that happen? Was her share 50%. How much did you buy her out for? When did that happen?

Customer: replied 2 years ago.

Gosh more detail

She did not pay for her share in the flat-i gave it to her at 50% that was in about Nov 1992

In the end she bought me out because the house was worth more than the flat- the balance was about £82,000. This happened in Dec 2005.

Expert:  TonyTax replied 2 years ago.
I have to ask questions to be able to give you an answer you can rely on. We are almost there now.

In November 1992, you gave your partner 50% of the flat. How much was the flat worth at that time?

In December 2005, you were bought out of the house you shared with your partner and took full ownership of the flat again. I will use the January 1996 value of £275,000 to determine the price for your partner's 50% share of the flat.
Customer: replied 2 years ago.

In Nov 1992 the flat was worth about £105,000

Yes i think using the £275,000 for dec 2005 is correct

Customer: replied 2 years ago.

Hi Tony

Sorry i can't find your answer-am i doing something wrong?

Expert:  TonyTax replied 2 years ago.

Thanks.

CGT only applies from 31 March 1982 so the value of the flat at that point should be used but as you bought it less than a year before, I have used £21,000 as part of my calculations.

For CGT purposes, the flat cost you £147,000 (£21,000 / 2 + £8,500 - £9,500 + £137,500). If you sell it in, say, December 2016, for £750,000 you will make a gain before the deduction of the expenses of purchase and sale of £603,000 (£750,000 - £147,000). By that time, you will have owned it for 417 months from 1 April 1982 of which you will have lived in it for 131, let it for 280 and it will have been vacant for 6.

The gain for the period the property was your main home will be exempt from CGT as will the gain for the last 18 months of ownership. That accounts for £215,461 (£603,000 / 417 months x 149 months). The remaining gain of £387,539 is split as to £378,863 to that part of the letting period gain which is not covered by the last 18 months of ownership and £8,676 to that part of the vacant period gain not covered by the last 18 months of ownership.

As the property was both your main home and it was let you will be entitled to letting relief which will be the lesser of:

1 £40,000,

2 the sum of the main residence period gain and the gain for the last 18 months of ownership of the property which is £215,461 and

3 the letting period gain of £378,863.

Letting relief of £40,000 will reduce the remaining gain of £387,539 to £347,539 and the annual CGT exemption of £11,000 (the current rate) will reduce it further to leave you with a net taxable gain of £336,539.

There are two rates of CGT, 18% and 28%. The rate or combination of rates that you will pay will be dependent on the level of the sum of your income and the taxable gain in the tax year of disposal of the flat. Using the tax bands for the current year (we don't know what they will be in 2016/17) and assuming the same CGT rules don't change by 2016/17, one of the following scenarios will apply:

1 If your income in 2016/17 including the taxable gain is £41,865 or less, then all the taxable gain will be taxed at 18%.

2 If your income in 2016/17 excluding the taxable gain is more than £41,865, then all the taxable gain will be taxed at 28%.

3 If your income in 2016/17 excluding the taxable gain is less than £41,865 but more than £41,865 when you include the taxable gain then part of it will be taxed at 18% and part at 28%.

I'm afraid that short of moving into the flat and living there for a long time, there really isn't much you can do to mitigate the potential CGT. If you sold your current home and bought another property to live in and stopped letting the flat, you could elect for the flat to be your main home but that election would only apply from the date you make it.

If you are married, you could put the flat in joint names but you and your spouse would both have to be living there (it has to be only or main home) when you did that for the main residence relief and letting relief you have already accrued to be split between the two of you. If you were not and you put the property in joint names, on a future disposal, your spouse lose out on the already accrued main residence relief and letting relief. Many people fall foul of that rule. Read about it here. The point of the property being in joint names would be to have more of the taxable gain charged at 18% as opposed to 28% but whether that would be the case would be dependent on the level of your spouse's income.

If you don't sell the flat until you retire, you may benefit from paying less CGT at 28% if you are a basic rate taxpayer at that time.

If you moved abroad, you may only be able to reduce your exposure to CGT in the UK but you may pay it in the country you establish tax residence in. I won't go into the rules as they are changing in April 2015 so that non-UK resident owners of UK residential property will become liable to UK CGT on their gains from selling such property but only on the gain accrued after 5 April 2015. The detailed rules have yet to be decided so, if that is something that may interest you, look out for the 2015 Budget announcements.

I hope this helps but let me know if you have any further questions.

Customer: replied 2 years ago.

Hi Tony

Thank you this is most helpful-your right it is complicated my PhD does not help. Just one last small question in your very clear calculations. i could not spot the existing mortgage that I have on the flat of of £238.000 would that come off the the net taxable gain of £336,539?

Many thanks

Norman

Expert:  TonyTax replied 2 years ago.

Mortgages do not figure in the calculation of the gain or loss on the sale of a property. They are not part of the cost of a property. If you paid £100,000 cash for a property and £100,000 for another property of which £60,000 was funded by a mortgage, both properties still cost £100,000 each even though one has a mortgage on it.

If you borrowed against the flat to buy another property, the cost of that property does not get offset against the gain on the flat simply because it was partly or wholly funded by a mortgage secured on the flat. The cost of the second property is deducted from the sale proceeds when it is sold.

TonyTax, Tax Consultant
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Satisfied Customers: 15882
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
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